Benefits April 27, 2012

Individuals in CDHPs More Educated

April 27, 2012 (PLANSPONSOR.com) - Those enrolled in consumer-driven health plans (CDHPs) tend to have higher incomes and educational levels and report better health behavior than do those in traditional health plans.  
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A report from the Employee Benefit Research Institute (EBRI) report examines the population enrolled in a CDHP and how it differs from the population with traditional health coverage and found CDHP enrollees were about twice as likely as individuals with traditional coverage to have a college or post-graduate education. In 2011, 24% of CDHP enrollees had a graduate degree, and 48% had a college degree, compared with 12% and 24%, respectively, of traditional plan enrollees. 

In six out of seven years of the survey, it was found that CDHP enrollees were more likely than traditional-plan enrollees to report excellent or very good health. CDHP enrollees were less likely to report that they smoke or did not exercise regularly, though it cannot be determined from the survey whether plan design had an impact on those self-reported factors.

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CDHPs generally consist of high-deductible health plans (HDHP) with either a health reimbursement arrangement (HRA) or Health Savings Account (HSA). As of 2011, roughly 21 million individuals, representing about 12% of the market, were either in a CDHP or an HSA-eligible health plan, according to the report.

“Consumer-driven health plans are a growing presence in the health insurance market, so it’s important to understand how they differ from traditional health plans,” noted Paul Fronstin, author of the report and director of EBRI’s Health Research and Education Program.

“It is often assumed that CDHP enrollees are more likely to be young than those with traditional coverage, because they use less health care, on average. However, in most years, the survey found that CDHP enrollees were less likely than those with traditional coverage to be between the ages of 21 and 34.” 

The full report is published in the April 2012 EBRI Notes, “Characteristics of the Population With Consumer-Driven and High-Deductible Health Plans, 2005–2011,” at www.ebri.org. 

Administration April 27, 2012

Regulations Changing DB Use of OTC Derivatives

April 27, 2012 (PLANSPONSOR.com) - Over-the-counter (OTC) derivatives, such as interest rate swaps, have become standard tools for defined benefit pension plans.
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These instruments allow pension plans to reduce risk and manage portfolios more efficiently. However, Towers Watson notes in a Perspectives paper, the financial crisis and subsequent changes in regulation mean it is likely that the way pension plans will use such instruments will change.  

Towers Watson explains that regulators have been looking at ways to improve the financial stability and security of the OTC derivatives market by promoting exchange trading and introducing “central counterparty clearing.” The aim of central counterparty clearing is to better manage the systemic, credit, operational and other risks associated with OTC derivatives. In other words, regulators want derivatives to be collateralized with a central counterparty, such as a clearinghouse, that is perceived to be less risky than bank counterparties due to the central counterparty’s more focused business activities and risk management framework. (Both the bank and the pension plan would face a third party rather than each other.)   

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However, not all OTC derivatives will be subject to central clearing in the short term. For example, some types of interest rate swaps, swaptions and longevity swaps are not being initially considered for central clearing.  

While pension plans cannot move all their interest rate derivatives to central counterparty clearing today, they should understand the impacts changes in regulation are bringing to market practice, according to Towers Watson.  

Pension plans should assume the following: 

  • They will move to a “cash as eligible collateral” world (and maybe short-dated government debt, too). 
  • Bank counterparties’ credit quality has weakened and could weaken further. This makes it important to take counterparty diversification, a counterparty bank’s credit quality and the package of terms a bank will offer into account when assessing with whom to transact. 
  • Either regulation or economic incentives will mean that both existing and new interest rate derivative exposures will eventually be pushed toward central counterparty clearing. 
  • It will become more common for other instruments to be used to gain leverage in order to invest more efficiently — for example, equity derivatives. 

Markets continue to be volatile, which means that effective risk management through the use of derivatives is as important as ever, the paper concludes. The operational uncertainty created by market and regulatory changes is not a reason to hold off from managing economic risks, but is an important implementation consideration.  

The full paper can be downloaded at http://www.towerswatson.com/united-states/research/6949.

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